3 Reasons Not To Worry About Insurance Companies Failing

(don’t forget to checkout the video of this blog too)

If you’re looking to use an insurance vehicle as part of your retirement planning you may have this question…

Insurance products are classified as “contractual guarantees”, but is that money really “guaranteed”⁉️

Legally, yes, it is.

And for a company to be able to use the word “guarantee” a LOT of protections must be in place.

This is very good news for clients seeking any source of true guaranteed income in retirement (to remove some of the uncertainty from their portfolio in their retirement years).

This is also valuable for clients looking to maximize the tax-free wealth that they are hoping to leave to their loved ones.

So for example purposes, let’s say that you purchase a deferred, income annuity to secure future retirement income….

But you’re wondering what would happen to that guaranteed income if the insurance company fails❔

Here are 3 reasons not to worry about that

✅ Insurance Companies Have VERY STRICT Reserve Requirements

When an insurance company promises to pay you guaranteed lifetime income they are required to maintain adequate levels of cash-on-hand to fulfill that guarantee.

This is fundamentally different from the way banks manage their reserves.

Banks only keep about 10% of the money they loan out in reserves, which means they are very highly leveraged.

If everybody went to the bank to get their money at the same time, most would leave empty handed.

Insurance companies are much different from a regulation and reserve-requirement standpoint.

Because of the nature of their business state regulators require insurance companies to be very cash-heavy to meet any immediate needs that might arise from the contracts they have issued (and guaranteed).

✅ The Self-regulating Nature of the Insurance Industry

The life insurance and annuity business is exclusively a confidence business.

If any company defaulted on annuity payments it would likely have a rippling effect across all other companies.

That’s why if a lower-rated insurance company gets into financial trouble it is usually absorbed by other companies in the industry (including all of its outstanding contractual guarantees).

Think about this: if a big insurance company didn’t make income payments to retirees, everybody would lose faith in the entire industry.

So it really is in their best interest to preserve this and they will do everything in their power to do so (which also translates to additional financial security for clients owning these types of products).

✅ State Guaranty Funds (similar to FDIC insurance)

Lastly, all insurance companies are required to may payments to a State Guaranty Fund..

This acts as an insurance policy if a contract is ever unable to be fulfilled.

In most states, that limit is around $300,000 per person.

So even though it’s incredible unlikely you would ever need to use a State Guaranty fund, it provides an extra level of protection just to ensure those guarantees are there when you need them.

Let’s chat 💬😎